Why Charter Communications, Inc. (CHTR) could blow up your portfolio

In the ever-evolving process of understanding what a stock is truly worth, we are going to look at Charter Communications, Inc. (CHTR) today from the standpoint of its EV/Rev ratio to see just what the company’s current market valuation implies about its worth as a take-out candidate. The EV/Rev ratio is also known as the Enterprise Value-to-Revenue ratio. It’s an alternative to price-to-sales that offers advantages by accounting for cash and debt.

In fact, one might suggest that the best way to achieve this is through taking a look at the company’s price-to-sales ratio (in this case, we are talking about 2.39). However, the problem with this measure, as noted above, is that it doesn’t consider the balance sheet as a tangible item.

For example, if you were to walk into company headquarters tomorrow and negotiate a deal to outright purchase Charter Communications, Inc, you would know you were going to own the company’s cash, and also take on its liabilities as your own. So, the balance sheet is part of the value of the company, and there’s no getting around it.

That’s why we might consider the company’s enterprise-value-to-revenue ratio as a superior means of valuing its current operational flows than price-to-sales. And in today’s innovation-driven market, operational flows seem to rule the day.

In this case, Charter Communications, Inc is currently in possession of an enterprise value of 152.51B. That number is derived from the company’s market cap (which is currently at 99.543B) minus its cash and equivalents (which currently sit at roughly 621M) plus its outstanding debt (now at 70.23B). Occasionally, you will see this number include minority interest and preferreds. However, let’s keep it simple today.

That gives us one half of the equation. The other half is the trailing-year revenues. For Charter Communications, Inc, we are talking about 41.58B. We use the trailing revenues to avoid having to consider potential inflections in the environment or flaws in company or analyst outlooks.

When we put them together, we get an EV/Rev ratio of 3.67.

It has been suggested that this method of valuing stocks struggles with unproven names such as penny stocks because they often have a checkered history in terms of operational success, and therefore, can end up with negative enterprise value. In other words, they have such small market caps that the balance sheet becomes the principal factor in the equation. And balance sheets can be highly variable from stock to stock in ways that may be misleading when trying to chase down the concept of “intrinsic value”.

Otherwise, investors may prefer other means of attempting to nail down the value of Charter Communications, Inc, including standard forward P/E (which comes in at 41.87), trailing P/E (which comes in at 10.56), price-to-sales, as we noted above (coming in at 2.39, price-to-book (which currently sits at 2.20), and enterprise value-to-EBITDA (10.06) — which represents the ratio of the EV to the company’s earnings before interest, taxes, depreciation, and amortization.

In any case, however you choose to nail down the valuation of a company, you are probably first going to need to admit that there is no one perfect answer.

Ash has been in the media business for over seven years both behind and in front of the mic and camera. After years of experience both at Wallstreet and Bombay Stock Exchange he has finally embraced the web with UsTradeMedia.com as a district manager and producer.